Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for October, 2008

Actually, today the Chinese launched a satellite called
Simon Bolivar for which the Venezuelan Government paid US$400 million to have
the Chinese build it.

Good deal for the Chinese, I Haven’t bought a
communications satellite lately, but I am sure the Chinese made a bundle
selling it and selling consulting and training going forward.

Supposedly, this satellite makes
us more independent. Sure, we have an independent communications satellite,
but it gives us little independence as if we don’t pay the Chinese I am sure
they will turn everything off.

To make the scene even more bizarre, we were told by the
autocrat himself that our scientists (which ones?) will use this satellite
somehow. I guess they will make phone calls or connect to the Internet or
something like that. This contrasts with the statements by Evo Morales, who was
invited to the launch, that he hopes the satellite favors the indigenous people
of Latin America.

Jeez, this satellite is certainly quite versatile if it
will satisfy both needs. It certainly has no remote sensing capabilities.

To complete the tour of ignorance and misleading statements,
we were told that it is the Ministry of Science and Technology that runs the
project.

—The
General Prosecutor called the Maletagate trial in Miami a “media show” with
no relevance to Venezuela. According to her, this trial has been going on for “very
long”.

I guess all of the accusations against prominent
Government figures are irrelevant to this bastion of Venezuelan Justice. And
given the fact that the suitcase full of cash was taken to Argentina about 15
months ago, it may be good to remind her of the trial of the cops accused with
deaths on April 11th. 2002, who have been detained for four years
and have yet to be brought to trial.

—And then, just like that, this
same lady turns around and says the accusations against opposition leader
Manuel Rosales brought up by President Chavez and Maracaiboâ€™s Mayor Di Martino,
will be investigated “in quick and expedite fashion”. This despite the fact
that she has no clue what the accusation of corruption is about and no formal
case has been presented yet.

What a difference between the two cases, no?

—And in the same case, the Venezuelan National Assembly discussed today
opening an investigation against Manuel Rosales. Since they are there the
Assembly will also
investigate him for trying to kill Chavez. Faster than a speeding bullet in
the middle of an electoral campaign. Such nice people!

—And then as a Director of the Electoral Board says that the Board
should investigate Chavez taking advantage of his position, the
head of the Board says that the institution she presides has no accusations
that the President is taking any advantage of his position. Funny, I guess that
Director must be irrelevant or does not exist, no?

After three large scale blackouts in the country so far in 2008, today Venezuela had a huge bytesout when apparently an optical fiber was cut by an excavator. The country was left with no connection to the Internet outside of Venezuela due to this and about four hours after it occurred the Minister of Telecommunications proudly reported that 80% of the service had been reestablished.

This all goes well with the revolution’s slogan “A paso de vencedores” (At the pace of winners), except they seem to do it all backwards…

In order to see how well Venezuela
may deal with the crisis, we have to quantify the “assets” the Government has
right now. There are two aspects to this. First, one needs to quantify dollar-based
assets in order to be able to satisfy import needs and debt service. Second,
one needs to quantify local currency assets in order to quantify the fiscal
picture.

It is not easy to know how much is
out there, by moving funds out of the Central Bank and into the development
funds one does not have regular information as to the assets available. Thus,
we can only look back at most numbers as of June 1st.

Venezuela currently has US$ 39
billion in reserves, which corresponds to roughly 9 months of imports. I have
never liked to use this number, because panic begins way before the money looks like
it is dwindling down.

I prefer to leave international
Reserves outside the calculation, so that I can look at how much money the
Government has in Bolivars as well, otherwise I would be double counting because those
Bolivars came from the backing of those same reserves.

Thus, we look at the dollars and Bolivars held by various institutions and later we add them up

Fonden: As of
June 30th. Fonden had US$
14.7 billion between cash and investments. However US$ 7.7 of that has been committed
to projects that are being executed and US$ 2.51 billion have been spent or are
due, leaving US$ 4.41 billion. We know Fonden has left about US$ 1.4-1.5
billion in Argentinean Boden 15’s purchase at 65%, but which currently trade
around 25%, representing a loss of US$ 560 million. Additionally, Fonden had
US$ 525 million in Lehman Brothers instruments, which are simply unavailable
for use. Thus, Fonden has no more than US$ 3.3 billion available, some of which
may be invested in Sovereign debt, which is at lower prices.

Total Fonden: US$ 3.3 billion (Not all of it may be in US$ but given the law
regulating Fonden I would assume it all is)

Bandes: According to its financial
statement Bandes
has more or less US$ 2.7 billion a number that has changed little in the
last six months. However, other Government funds different than Fonden, keep
their foreign assets in US$ at Bandes, in June this amounted to US$ 7.9
billion

This can be compensated with
Bandes and Fonden funds. Alternatively, a 30% devaluation would yield US$ 10
billion. Thus, the numbers don’t look terrible at US$ 80 per barrel. At US$ 60
there are problems because you need and extra US$ 10 billion, thus you would
deplete Fonden and Bandes and have to devalue.

It thus looks like we will see a
devaluation, use part of the Bandes and Fonden funds and I suspect there will
be an increase in both the value added tax as well as the implementation of a
debit tax.

Before you think I am too
optimistic for 2009, I really don’t think the average price in 2009 will be
below US$ 60 per barrel even if it looks that way right now. Oil prices are
likely to overcompensate on the down side as much as they did on the upside,
given the uncertainty in the future of the world economy. Prices are acting
right now like the worst case scenario is likely. I am not sure that is going
to be the case.

More worrisome is the balance of
payments issue.

Revenues from oil exports (US$80
per barrel)US$ 38 billion

Other ExportsUS$6 billion

TotalUS$ 44 billion

Imports this yearUS$ 54 billion

DeficitUS$ 10 billion

Thus, this is really a problem, because you would have to use all of
Fonden and Bandes US$ in order to satisfy dollar needs or draw down
international reserves. The problem is that M2 is getting to be US$ 80 billion,
so if reserves drop, people are going to get quite nervous.

Note that this is the optimistic
scenario of US$ 80 per barrel. Things would get really critical at US$ 60 per
barrel.

Even more worrisome, note that the
Government would have no money to intervene the parallel swap market which
could go to stratospheric levels and thus a devaluation looks inevitable.

Finally, I have not included in
any of this Chavez’ folly of nationalizating Cemex, Petrozuata, Cerro Negro,
Sidor and Banco de Venezuela. All of those add up to US$ 14 billion. By late
2009 one may expect one of the two heavy oil arbitrations to come to a close
and Chavez is likely to pay Banco de Venezuela US$ 1.2 billion before the end
of the year.

It certainly looks like things
will get very complicated at these levels of oil prices for the Venezuelan oil
basket. In both the ficsal and balance of payment scenarios a devaluation certainly looks like a sure thing in the first half
of 2009.

On Sunday, Venezuela
had its third large
scale blackout of the year. Blackouts occur daily all over the country, but
these large scale ones are a new phenomenon which coincidentally has occurred just
a year after the Government took over all of the private electricity companies
in the country.As has been the case in each one, the word “sabotage”
was mentioned immediately by a number of Government officials, but as usual,
there is no evidence of that. Yesterday the Head of the Government’s
power company admitted
it was a bad adjustment in the protection system that led to the blackout, while
the usual fanatics, such as the President of the Electric Power workers union,
who doubles as a pro-Chavez Deputy of the National Assembly, continued talking
about sabotage. Meanwhile the Prosecutor detained the three workers responsible
for the bad adjustment.

In fact, the President himself praised the speed
with which electricity was restored as evidence of the effectiveness of the
state’s electric power system. Unfortunately Chavez said that it only
took 15 minutes for power to be restored. This must have been for the Presidential
palace because I certainly had no lights for over two hours and some parts of
the country had to wait as much as six hours to see the light. A Government
official actually said about four hours after the blackout that it had been
restored in 80% of the country contradicting the President or those that suck
up to him by hiding the truth.

So the pantomime continues, while Hugo Chavez
promises a refinery one day, a pipeline the next and to solve the electricity
problem before the end of the year, nothing happens. A government that does not
believe in know how and expertise. Who thinks that anyone can do any job
(including being president) is setting back the country a few decades. The
money that should have been used to improve the electric power infrastructure
of the country was instead used to satisfy another whim by the autocrat. He spent
a couple of billion US dollars buying out perfectly functioning electric private
companies, while the rest of the power system own by the Government deteriorated.Just
look at the power generation plant Planta Centro, a 2 GW plant owned and
run by CADAFE, the stateâ€™s electric company.

So, the Government spent money on buying working
companies when oil was high, rather than invest in repairing or building new
electrical infrastructure.

Substitute electric power for oil, telecom, water
services, whatever you like and you know what may happen. Of course, in Chavez’
folly oil will stabilize around US$ 100 per barrel, but guess what, it ain’t
happening, as the Venezuelan oil basket hit US$ 68 last week, down to the
levels that gave the Government so much problems in 2007, except that the cost
of producing Venezuelan oil is up from around US$ 21 per barrel to US$ 28 per
barrel during that period:

This is my very special Cattleya Violacea, not only is it free flowering, but this time it sent up two shoots with ten flowers (six and four) as shown on the left. This despite the fact that we crossed it in April with Cattleya Violacea “Muse” and I removed the fruit two weeks ago. On the right a close up of the six flowers.

Above left you can see what good sahep and color thisf Violacea has. On the right a Cattleya Phalenopiss Ever Spring Light

On the left is the first flowering a Cattleya Jenmanii Kathy x Color which I bougth from Xavier Caballero. On the right is the “small” flower which is large.

Above is the second flower of the Cattleya Jenmanii above, I have placed a brand new pencil behind it so people can see how large it is. On the right is Blc. Morning Glory x Lc. Bonansa

Co-conspirator Carlos Kauffmann who has pleaded guilty of
being an agent for the Venezuelan Government in trying to cover up the origin
of the 800,000 dollars in Antoninis suitcase, testified on Friday without the
jury being present. As explained well by Javier Caceres in Notiven, the reason
for this testimony is that the judge will allow the defense to tell the jury
that Duran was entrapped by the FBI into committing a crime, which the
prosecution wants to counteract by showing that Duran had a long history of
corruption and services with the Chavez Government and trying to fix the
Antonini problem was just a natural continuation of Durans record.

What the Prosecutor had the judge do was give details on
the earlier statements by Kauffmann on the many ways they made money off
corrupt officials in the current Venezuelan Government. This had been included
in an earlier affidavit discussed
here in this blog, but this time Kauffmann gave a lot more details,
including many names. El Nacional has
made a diagram of all of the links and connections of the people involved
with Maletagate with Government officials in Venezuela and Argentina.

Kauffman began talking about the National Guard. He
mentioned sic names including General Victor Jose Molina who has denied doing â€œbusiness
with Kauffmann, but did admit knowing him. He said these people handled the
finances and purchasing within the National Guard. We were their bankers¨ said
Kauffmann. We handled millions of dollars for them, charging them 10%, which I
would divide with Duran. We handled millions in cash said Kauffmann.

With the Governor of Cojedes Johnny Yanez Rangel,
Kauffmann said he had a long history. Recall that Yanez Rangel was part of a
protest in front of the US Embassy when Kauffmann was detained, where he
defended his entrepreneur friends and that local reporter Leocenis Garcia
showed that it was Kauffmann who paid Yanez vacation at the luxurious Llao
Llao hotel in Bariloche, Argentina.

According to Kauffmann, they would direct the deposits
from Cojedes State to Bancoro, a regional bank, charging 10% of which the
Governor would get a 30% kickback. They would hold and manage that 30% for the
Governor and charge him 10% for it pr year, which Kauffmann would split with
Duran. Duran and Kauffmann also got contracts for public works of the order of
US$ 10 million of which they would kick back 10-15% to the Governor.

In Vargas State, the same one that was destroyed by mudslide
in 200 and has never recovered (but remains rabidly Chavista, go figure!), they
would also direct deposits to Bancoro and kick back 40-50% to the Governor, who
they gave 250,000 US dollars for his campaign. They also executed US$ 30
million in public works, of which they would give the Governor directly 10-15%
and Governor Rodriguez would take care of distributing around to other
officials.

On the Citibank building Kauffman said that it was not a
great deal. They bought it for US$ 4.5 million and sold t two weeks later to
the Ministry of Finance for US$ 9.5 million. Kauffmann said they had to pay off
not only Minister of Finance Tobias Nobrega, but also Jesus Bermudez, Alejandro
Dopazos and Lenin Aguilera. Recall that Bermudez was caught arriving in Miami
in a private airplane with US$ 40,000 in cash for Christmas Gifts in another sign
of how the revolution has lost touch with reality. Kauffmann said he did not
mind making only US$ 200,000-300,000 on this deal, because it helped them gain
the trust of the Ministry officials and later they bought bonds for US$ 50 million,
which they later sold for US$ 100 million, paying off the Ministry officials
US$ 25 million in kickbacks.

Kauffmann also mentioned the Ministry of Education and Fogade;
the latter has been involved with a number of corruption cases, which actually led to the firing
of its Head Jesus Caldera Infante. Among other jewels, Caldera Infante gave
about US$ 50 million to a manager purportedly representing a foreign bank. The
man was shot dead in Caracas and the money was never found.

Kauffmann said that Duran and him got paid for directing
deposits to Banesco, Banco Federal, Bancoro, Banco Bolivar and Banco Canarias.
Some of these banks said that this was false and that Kauffmann had no account in
them. Well, everyone knows how official deposits are moved around the country
and I can assure you all payments are made in cash, no accounts needed.
Remember I wrote
a long post about this racket in 2005.(Funny Kauffmann did not talk about his role in selling bonds to local banks, that was another swindle he was known to participate very actively in)

Finally testified that the Government asked them to fix
the Maletagate problem and they willingly did it because this would get them
future deals and protect their property. In fact, the Government has seized the
shares Kauffmann and Duran had in petrochemical company Venoco as part of the
local investigation which has yet to be made public and it is unclear what the
charges will be or who will be charged.

But so far, no investigation has been opened on the huge
number of Government Officials: Ministers, Governors, Generals, Head of
Intelligence and the like that have been accused of being part of the kickbacks
and corruption rackets. In any reasonable country the scandal would be huge and
the Prosecutors would be having a field day.

Everyone wants to understand what the recent 50% drop in
oil prices means for Venezuela. The problem is that there are n simple answers
mainly due to the lack of transparency in the country’s numbers. There are two
approaches to this problem: In the first one, you can take what you believe in
and describe it, which is what I tend to do. The second approach is to present the “official” story and compare it to what analysts and your own logic may say.

In what follows I will try to follow largely the second
approach, that is relate what the official version of the numbers is and then
try to point out where the discrepancies and problems are, while trying to keep
it simple. I am actually repeating things I have said before on oil, but the
recent drop in prices suggests it is important to review it. To keep the
subjects separately I will cover only oil in this first part.

We were told yesterday that the 2009 budget set the price
of a barrel for the Venezuelan oil basket at US$ 60 per barrel. This number on
its own is meaningless, because you only get dollars for your exports.That is the relevant number at the end
of the day.

Thus, you need to know:

Total Production

Subtract Internal Consumption

Subtract oil sold as part of intra Government treaties, or
at least figure out what fraction of that you get paidfor.

—Production

Here is problem number one:

PDVSA says production is around 3.15 million barrels per
day

The International Energy Agency and OPEC says productions
is around 2.45 million barrels of oil a day

No matter how you turn this one around, it is hard to
believe that OPEC is wrong, after all Venezuela is a member and has argued and
tried to change the number. Sadly, the 2.45 million number takes the country
back to 1997 in oil production.

—Internal
Consumption

This is the key:

Official number: 530,000 barrels of oil a day

My Estimate: 800,000 barrels a day

Ramon Espinasa’s estimate 750,000-800,000

Who is right?

Well, let’s look at the evidence: In 2001 PDVSA stated
that internal consumption was 510,000 barrels of oil a day.Thus, PDVSA claims internal consumption
has gone up 20,000 barrels a day since 2001. But, between 2002 and 2007 the
Venezuelan economy supposedly grew by 44% and the number of vehicles increased
by 50%, the price of gasoline has drooped by more than 50% in real terms and the
price difference between Venezuela and Colombia is a factor of 30 (I take these
numbers from Espinasa).

Thus, it seems unbelievable that production has increased
by barely 20,000. My number comes from the increase in vehicles alone using
numbers from the car salesmen association.

Clearly, the PDVSA number makes no sense.

—Exports
under Treaties

These are all official numbers for 2007 except China which
is official 2008:

Petrocaribe 138,000 barrels a day

Caracas Cooperation Agreement: 70,000 barrels a day

Argentina: 34,000 barrels a day

Cuba: 92,000 barrels a day

San Jose Pact: 80,000 barrels a day

China: 80,000 barrels a day

The problem here is that conditions vary. Cuba has two
years grace period plus long term cheap financing. Petrocaribe has 50% plus
long term cheap financing, as well as the San Jose Pact. China never pays, the
oil pays for projects, so that there is no cash flow for PDVSA. The total is
486,000 barrels of which 170,000 does not get paid, leaving 316,000 barrels,
only about half or 158,000 barrels of which gets paid and generates dollars for
the country and cash flow for PDVSA.

Thus, of the total left after local consumption, you
subtract 486,000 and then add 158,000

—Summary

With all of the above, the believable numbers are:

Production 2.45 million a day

Consumption-800,000 million barrels a day

This gives 1,650,000 barrels a day.

But you have to subtract 486,000 and then add 158,000.

Thus, the most likely number for Venezuela’s exports of
oil is:

1,322,000
barrels of oil a day

This would provide foreign currency revenues for the
country at the following levels:

Price (Billions of US$)

Revenues (Billions of US$)

100

48.25

90

43.43

80

38.60

70

33.78

60

28.95

50

24.13

I will use these numbers in the latter parts, but you see
the picture: Venezuela will import over US$ 50 billion this year. Of curse, the
country has other sources of foreign currencies, but the picture is not pretty
if the country can’t borrow abroad.

The trial in Miami is winding up and
nothing major deserving a new article has really happened, but there have been
some loose ends that have to be mentioned for the record:

—Earlier, the Venezuelan
Prosecutor had ordered the assets of Maionica and Kauffmann seized, but had
curiously left defendant Franklin Duran out. None of them have been charged of
anything yet, but the Prosecutor made it look a little better ordering the
freeze of the assets of both Antonini and Duran.

—According to an Argentinean newspaper, a customs agent that
was present when Guido Antonini went through customs with the US$ 800,000 in a
suitcase, has testified in Argentina
that other suitcases were allowed through without being checked.

—The judge in the
maletagate case said it will allow the defense to argue entrapment in the
case. Duran’s Attorney will argue that his client went to Miami
not as an agent of Venezuela
to help Guido Antonini, but to help him as a friend.

—Because of this
decision, the Prosecution has then
requested that Carlos Kauffmann testify again before the trial ends. It was
believed that there would be no more witnesses, but the Prosecution wants to
present additional evidence to counteract the argument that Duran was acting
out of friendship.